O.C. BUSINESS PLUS

Irvine's Interplay Teams Up With Microsoft

Software: Adventure based on 'The Matrix' will have special features keyed to new Xbox game console.

Microsoft Corp., cutting a deal with Irvine video-game publisher Interplay Entertainment Corp., has lined up exclusive rights to a game based on the movie "The Matrix" for the software giant's new Xbox game console, a regulatory report disclosed.

The agreement, which calls for Microsoft to lend Interplay $5 million, provides for online play only through Xbox.

Although Interplay has the right to publish the game for other consoles after six months, the Xbox version will contain extras such as more vehicles, weapons, music and perhaps a video of the movie, according to the report, which Interplay filed with the Securities and Exchange Commission.

Microsoft is seeking to secure games exclusive to Xbox to persuade players to buy the device instead of rival machines from Nintendo Co. and Sony Corp. Xbox is scheduled to go on sale in the U.S. by the end of the year.

"At the end of the day, if you're Microsoft, you need that exclusive content as the new kid on the block," said James Lin, an analyst with Jefferies & Co.

Other companies that have agreed to make games available exclusively for Xbox include Tecmo Ltd. and Sega Corp.

"The Matrix" is a science fiction movie featuring martial arts and characters who dodge bullets. The film, released in 1999, has been used by Sony to demonstrate the ability of its PlayStation 2 game console to play digital versatile disc movies.

Interplay must publish the Matrix game no later than three months after the debut of "The Matrix 2" movie, the filing said. The film is scheduled for release next year. Interplay also agreed to spend at least $500,000 developing online features available only through Xbox.

Interplay shares rose 28 cents to $2.18 on Tuesday, while Microsoft's stock moved up $2.42 to $70.17 a share. Both stocks trade on Nasdaq.

The Microsoft agreement figures to give a much-needed boost to Interplay, which has posted losses in nine of the last 10 quarters.

Investors are likely to see Microsoft's $5-million loan as "added ammunition" to help Interplay compete in the gaming industry, said Patrick Winton, an analyst with Roth Capital Partners, which recently helped the struggling video game publisher raise $12.7 million to restructure debt and continue funding operations.

"We believe Interplay is poised to benefit from the increased demand for next generation consoles," he said. "They've been successful in developing games for the PC and we would expect them to leverage that success as they enhance their presence in the second generation console market."

But analyst Michael Wallace said the deal with Microsoft will have limited benefit for Interplay.

"It's not a huge event, but it helps," he said. "'The Matrix' is a big title. Outside of that, I don't think people are going to be paying Interplay for exclusives."

While not a groundbreaking event,the arrangement shows that Microsoft has confidence in Interplay's product development and the quality of its games, said James Lin, an analyst with Jefferies & Company Inc.

Interplay agreed to repay the $5 million by June 30, 2003, through royalties on the sale of the Matrix game and four other games in North America, it said in the SEC filing.

Interplay's filing also included a royalty agreement with Microsoft for other Xbox games. Interplay agreed to pay between $5 and $7 per unit of Xbox software sold. That's less than PlayStation 2 royalties, which average about $8 to $10, Lin said.

Officials at Interplay and Microsoft weren't immediately available to comment.

Times staff writer Leslie Earnest and Bloomberg News contributed to this story.